Form 1116 re-sourced by treaty (for US sourced dividends and interest)

[MSS1976]

Hi everyone,

I am a U.S. citizen resident in Canada with a question about the "certain income re-sourced by treaty" category on Form 1116.

I have U.S.-source interest and U.S.-source dividends that are reported on both my U.S. and Canadian tax returns. To avoid double taxation, I intend to claim the Foreign Tax Credit on my U.S. return using Form 1116, re-sourcing these items as foreign-source under the U.S.–Canada treaty.

A few things I already understand going in:

For the dividends, the U.S.–Canada treaty caps U.S. withholding at 15%, which I will claim as a credit on my Canadian return. Therefore, on Form 1116 I intend to claim only the excess Canadian tax above that 15%, not the full Canadian tax on the dividends.

Some of my dividends are non-qualified, meaning they are taxed in Canada at ordinary rates that exceed the 15% treaty rate — so there is meaningful excess Canadian tax to claim.

My specific question:

Can U.S.-source interest and U.S.-source dividends — both re-sourced under the same U.S.–Canada treaty, both passive-type income — be combined on a single Form 1116 with box (f) "Certain income re-sourced by treaty" checked? Or is a separate Form 1116 required for each, one for the interest and one for the dividends?

Thank you in advance for any guidance!

[nelsona]

US Interest:
As you say, since the interest would not be taxed in US but for the fact you are a US citizen, you claim (on a re-source 1116) that income as if it was Cdn. using the US tax (not the Cdn tax) as the "foreign" tax you wish to take credit for. You would not claim any FTC on your Cdn return on this US income or tax.

US dividends:
You would (on the same 1116) report the US dividends, and claim the US tax (not the Cdn tax) on those dividends in EXCESS of 15% as the "foreign " tax you wish to claim. Of course, if your overall EFFECTIVE 1040 taxrate is less than 15% you have no excess tax. Also, if your US dividends are qualified in US, and your income is less than $500K, your dividends are taxed at 15% or less already, so you have no claim to make for this either.

For Canada, you only claim the 15% (or less, if your US taxes were less than 15%) that you calculate in (before any FTCs are taken on your US return), All US-source dividends are non-qualified for CDn tax purposes.

So, remember, that tax you are claiming on re-sourced 1116 is NOT Cdn tax, it is the US tax you initially calculate which is in excess of 0% for interest, and upto 15% for dividends. The line in your post that states:

"For the dividends, the U.S.–Canada treaty caps U.S. withholding at 15%, which I will claim as a credit on my Canadian return. Therefore, on Form 1116 I intend to claim only the excess Canadian tax above that 15%, not the full Canadian tax on the dividends."

is not correct. You can't claim any Cdn tax on US-source income on that 1116 (or any other 1116). That is why you are re-sourcing the income, But then you can still only claim some of the US tax paid.

The only Cdn tax you can ever use to claim on a 1116, is for income that is Cdn-sourced.

[MSS1976]

Thanks for the clarification! Can I use one form 1116 to resource both (the US interest and US dividends—in excess of 15%)?

[MSS1976]

Never mind. I see the question was already answered. :-)